Partial transcript of the press briefing Q&A with Michael Cohen, Director of the California Department of Finance, on the proposed fiscal year 2014-15 state budget. The press conference was held on Jan. 9, 2014:

Question:
Let me follow up on the counties issue…I’m a little confused here because every budget is a fresh start. Every budget has to be approved differently every year based on circumstances. And yet, you’re saying because we had a deal in the 13-14 budget, we can’t change the deal to speed up payments for reimbursable mandates for counties. I don’t quite get that. Can you explain that a little bit?

Michael Cohen, Director of the California Department of Finance:
Sure. Basically this modest surplus there is the cumulative result of all of the agreement we’ve made over the sat few years. So if we’ve just sort of started afresh and scrapped all of the agreements we’ve made since Governor Brown took office, we wouldn’t have a surplus at all.

So we’re very committed to paying down the wall of debt as you know, very committed to our county partners, and we are very much supportive of paying off the mandate dollars that we owe them. It’s just a matter of picking which liability in which year, and this year we’ve put an emphasis and a priority on making sure schools have their deferrals eliminated and eliminating the economic recovery bonds.

…

Question:
I’ve got a question about these infrastructure finance districts. This is sort of to replace redevelopment. It says the administration will work on legislation to make it easier for locals to raise money, including a 55% vote. Is that a tweak on Prop. 13?

Michael Cohen, Director of the California Department of Finance:
No, absolutely not. Infrastructure financing districts exist in state law today, and the two-third vote requirement to create them was a decision by the legislature when they statutorily created the infrastructure financing district. So there’s nothing constitutional that would even require a vote of the people on creating an infrastructure financing district just like there wasn’t a constitutional requirement on a vote of the people to create a redevelopment agency. So it’s a statutory change.

Question:
[Inaudible]

Michael Cohen, Director of the California Department of Finance:
It’s a lowering of an existing statutory barrier to their creation but not a constitutional one, and Prop. 13 had nothing to do with.

Question:
So there wouldn’t have to be anything on the ballot to lower it?

Michael Cohen, Director of the California Department of Finance:
Correct, it’s all a statutory change.

Question:
And the idea is to have a 55% vote of local to create one of these districts and to approve any bonds that would be sold by the district.

Michael Cohen, Director of the California Department of Finance:
Basically, the voters approved the overall construct of that so they could in the vote could determine whether or not they need the bond authority or not. But basically, it’s a 55%…there’s a 55% vote to decide whether or not you want to use tax increment financing, and then same way redevelopment worked – the bonds are then sold as against that tax increment, and so there wouldn’t necessarily need to be…

Question:
So they don’t need additional approval to sell bonds?

Michael Cohen, Director of the California Department of Finance:
No, they would have the ability to sell bonds under the law. The key difference between redevelopment and IFDs is more specific on what types of projects can be funded. You have to get positive okay from anyone – any other local governments that are affected. So redevelopment just had statutory authority to take a county or a special districts property tax increment. Here the special district or the county would need to agree to participate in it and there’s no affect on schools or the state general fund because of their participation.

Question:
Do you expect any of the $10 billion in Prop. 98 money is going to be used to pay down the cost of [inaudible]…?

Michael Cohen, Director of the California Department of Finance:
Not in the budget. As the governor said, we are convening stakeholders discussions and we expect we will have a plan in place for the 15-16 budget – so a year from now. But at this point, the $10 billion is being invested in the local control funding formula and eliminating the deferral to schools.

Question:
Can you talk a little bit about the corporation tax? You’re projecting that the revenues from Prop. 39 is about $150 million less than you thought…Can you say why you think that’s happening? And then similarly, you’ve got a trend towards large refunds related to taxpayer dispute resolution. What is going on there?

Michael Cohen, Director of the California Department of Finance:
Sure, for those of you who have been following the corporate tax for a number of years you’ve seen both us and the Legislative Analyst large swings in our revenue forecasts from time to time. It’s getting increasingly difficult to forecast the corporate tax given all of the tax policy changes that have been made over the last decade.

In terms of Proposition 39, the Franchise Tax Board when it originally passed was using 2010 tax data as its base estimate. They are now using 2011 data. So one year more recent.

And changes in individual corporations, how they’re distributing. There are three factors that the large corporations if they ever change you can have pretty significant swings. So that’s – basically we’re using more recent data and the data is telling us that a number of large corporations have changes in their circumstances between 2010 and 2011.

Question:
[Inaudible]

Michael Cohen, Director of the California Department of Finance:
The mandatory single sales factor that we now have is all based on sales within the state of California so it’s driving off of how much they sell here and so the whole point of the policy change was a corporation wouldn’t have a disincentive to set up here, own property, have California employees. And so it’s driving simply on what their sales are and the revenue difference is really kind of comparing to a theoretical world of if Prop. 39 hadn’t passed, what they would have otherwise paid.

Question:
So it doesn’t have to do with change in corporate behavior?

Michael Cohen, Director of the California Department of Finance:
No. It’s just a different estimate and it has to do with different corporate finances that have changed between 2010 and 2011 and we’ll continue to refine the number going forward.

Question:
Does that mean that sales are down? I mean if the sales factor is what it’s based on…?

Michael Cohen, Director of the California Department of Finance:
It has more to do with – I mean, it’s all relative to how their sales compare to property compare to payroll. You’ve got multiple moving parts. I’m not sure you can tag it to just one of those moving parts.

Question:
Can you address the large refunds on tax disputes? Is there any particular type of dispute you’re…that’s driving that?

Michael Cohen, Director of the California Department of Finance:
No, it’s just more of a general trend based on that some corporations had put funds on deposit in prior years to avoid penalties…

Question:
Do you know if it’s the large corporate underpayment penalty or anything in particular?

Michael Cohen, Director of the California Department of Finance:
That certainly has changed corporate behavior in terms of how much they’ve paid in certain years and so we’re adjusting based on how much they ultimately owed versus how much they thought they much owe.

Question:
Can you talk about why you’re expecting a bigger surplus than the LAO expected when they put out their November report?

Michael Cohen, Director of the California Department of Finance:
We’re actually fairly similar. I think they were a little bit higher than us. They were at $5…

Question:
Not for just ’14. Not for this June. They had about $2.4 and you guys have about $4.2.

Michael Cohen, Director of the California Department of Finance:
Oh, in terms of just through the current year. I think the biggest factor is a lot of prior year adjustments that they didn’t know about. So every time in January when we build the budget, we basically go back to look at our departments and how much did they save. There were some big lower spending than the LAO reflected, and we’re also constantly updating our revenue accruals. So lots and lots of moving pieces but kind of that prior year adjustment.

Question:
So basically there’s less money spent, more money left over than the LAO knew about.

Michael Cohen, Director of the California Department of Finance:
Yeah.

Question:
…The unfunded liabilities chart over there is a lot bigger than it used to be. Usually you guys just talk about retirement liabilities. Why bring up all these other things this year?

Michael Cohen, Director of the California Department of Finance:
Actually, if you go back to May 2011, which was the first time we sort of started talking about the wall of debt and all that, you had charts in that document that pretty much, I think, covered these. But the one new one that we are highlighting is the deferred maintenance at $65 billion. That’s all of the state’s infrastructure, where we haven’t been sort of keeping up on it. Much of that is in the state’s roads. Our state’s park system also has a large deferred maintenance. So that one is a new one and we’re trying to highlight it. The budget includes $100 million general fund to start chipping away at that – at parks – and then there’s an overall package of $815 million deferred maintenance package. That includes the repaying of early transportation loan of $350 million or so. And so, we’ve kind of piece together a package of $850 million to try to get a handle on our deferred maintenance…Catch up but clearly we’ve got many years ahead of us before we’ll be able to eliminate that number.

Question:
…They’re implementing a new funding that supports workloads rather than historical [inaudible]…They’re doing it at like 5% a year plus new funding that they receive. And I’m curious. Do you guys think that that’s fast enough? Do you think they’re doing it in good faith or do you think they’re dragging their heels?

Michael Cohen, Director of the California Department of Finance:
I think we’ve been pleased with the work the judicial branch has done on the formula and we expect that this $100 million will go into that and sort of address sort of historical inequities in funding distribution. They’ve done a good job on that formula.

Question:
On the courts again, the $500 million – is that ongoing or one-time?

Michael Cohen, Director of the California Department of Finance:
Ongoing.

Question:
Okay, and then the pensions language in there. You’re talking primarily about the trial courts employees?

Michael Cohen, Director of the California Department of Finance:
There is longstanding, sort of, disparities in trial court employees in terms of how much they pay to their pensions. It’s a remnant of pre-state funded trial court system. And so there are some employees in the court system that still pay nothing to their pensions and clearly with the governor’s signing of pension reform in 2012, that was one of the keys that we need to move towards employees paying for roughly half of the normal cost of their pensions. So we’d like to see all public employees within the state move to that.

Question:
How do you do that? I mean, you’ve got 58 different trial court contracts plus you also have the branch employees some of whom do not pay for their pensions?

Michael Cohen, Director of the California Department of Finance:
I didn’t say it was easy. Anything in terms of pension reform is a hard slog and it takes a dedication at the negotiating table. And you look at what the state’s done over the last few years and it’s kind of an example of how we think it should go. But it certainly – it’ll be a challenge for the court system but we think they need to get there.

Question:
Well, is it something that you want to do on a state level? You want to make all negotiations at the state level?

Michael Cohen, Director of the California Department of Finance:
We don’t have any proposal regarding changing the court employee relationship at this point.

Question:
[Inaudible]

Michael Cohen, Director of the California Department of Finance:
We can follow up with you. I’m remembering $23 million statewide as the number of dollars that aren’t being contributed…

Question:
It looked like in the documents you all have teased out what you’re calling windfall versus everything else. Am I right on that?

Michael Cohen, Director of the California Department of Finance:
Yeah.

Question:
And so most of it you’re calling a windfall. Is that a fair assessment?

Michael Cohen, Director of the California Department of Finance:
Yeah, I think we put $4 billion on capital gain windfall, and that’s basically the level of capital gains that we’re expecting to receive in the current and the upcoming fiscal year above what we view as normal. And normal being the historical average of as a percentage of personal income. So we will always have some level of capital gains but as the chart really shows they shoot up and shoot down, and we’re trying to capture the increment of tax revenues that are above that normal. And we’ve put it at $4 billion, which is roughly the same as what we would say is the modest surplus.

Question:
On corporate refunds. So it’s $600 million and you expect it to continue to rise. Is it because the state was too aggressive in trying to make tax collections? To what do you attribute this?

Michael Cohen, Director of the California Department of Finance:
We’ve changed our tax policy to – and this is late 2000’s – to try to – I mean, part of the way they were balancing the budget was changing tax policy to try to accelerate revenues into earlier years. So to the extent we’re seeing higher refunds now, I think that’s certainly one of the factors that if it was done to accelerate money and not actually change any liability, this is sort of part of the catch up phase…

Question:
Well, I mean, net operating losses were suspended and now people are going to get those back in…

Michael Cohen, Director of the California Department of Finance:
We factor all of the legislative changes like the NOL into our forecast. But it’s – I can’t tell you that we won’t be standing up here a year from now and I won’t be talking about major adjustments to the corporate taxes. It’s become very, very difficult to forecast because of all of these complicated law changes that have been made over the last decade.

But to the best of our ability, we factor in, you know, the behavior that we’re expecting based on laws.

Question:
[Inaudible]

Michael Cohen, Director of the California Department of Finance:
Concerning certainly. The corporate tax’s sort of roughly a $10 billion tax. So roughly 10% of our general fund revenues and to have hundreds of millions of dollars swings in a tax, we’re not able to pinpoint exactly what’s causing them. Sure, that’s concerning, and that’s area that my team has dedicated a lot of time to understanding better. But there’s more work to be done. We’ll certainly keep working at it because I do want to understand what’s going on with the corporate tax much better.

Question:
[Inaudible]

Michael Cohen, Director of the California Department of Finance:
Sure, basically this chart is a reflection of the benefits of Proposition 30. When you look at the proposition minimum guarantee – this is guaranteed funding for K-14 schools. So K-12 through community college. We were down at $47.2 million. We’re now in the upcoming year expecting to be at $61.6 billion, growing to nearly $70 billion over the next few years. And that’s clearly the benefit of the extra revenues provided by Proposition 30.